By Andrew Bushe
DUBLIN — Allied Irish Banks has fired six senior managers at its U.S. subsidiary, Allfirst, after an internal investigation found that a breakdown in controls there led to the fourth-largest foreign-exchange trading loss in history over a period of five years.
Escaping the cull are AIB’s chief executive officer, Michael Buckley, and Allfirst’s chief executive officer, Susan Keating.
Resignation offers by AIB chairman Lochlann Quinn and Buckley were unanimously rejected by the board, which endorsed its “full confidence in both men” after taking into account the findings of a report by Eugene Ludwig — the U.S. comptroller of the currency during the Clinton administration.
Allfirst foreign currency trader John Rusnak had earlier been dismissed after it claimed last month that he was responsible for the $691 million loss in alleged fraudulent activities.
AIB said the executives Baltimore-based Allfirst’s treasury and audit departments were being dismissed because they had been directly responsible for oversight of Rusnak’s activities, “or should have been aware of them.”
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“They had failed to detect the situation over a long period,” the bank said.
Quinn told Ireland’s RTE radio the executives who should have been monitoring Rusnak “went to sleep on the job.”
Those dismissed are David Cronin, executive vice president and treasurer; Jan Palmer, senior vice president Treasury Operations Administration; Robert Ray, senior vice president Treasury Funds Management; Laurence Smith, assistant vice president Operations and Financial Analysis; Michael Husich, head of Internal Audit, and Lou Slifker, team leader Internal Audit.
AIB has also made organizational changes at Allfirst with Eugene Sheehy moving from his senior post as managing director of AIB in the Republic to become chief executive officer of the U.S. division and executive chairman designate of Allfirst.
Allfirst’s chairman, Frank Bramble, and AIB’s group treasurer, Pat Ryan, who the bank said had both said in January they would retire, will now go in June.
Measures are being taken to strengthen controls across the AIB group consistent with the findings and recommendations of the inquiry.
Management and control of all treasury activities will be centralized in the Dublin headquarters and all proprietary treasury activities will cease both at Allfirst and in the bank’s Polish division,
The 61-page report found that no one at AIB or Allfirst, outside the Allfirst treasury group, was involved in, or was aware of, fraudulent or improper trading at Allfirst before the discovery of the losses last month.
Quinn said there were “some indications” that Rusnak had involved people outside the bank.
“It is going to take us some time to sort of track down the detail of it and Mr. Ludwig indicates in his report that this is going to take some further investigation,” Quinn said.
“There are indications that Mr. Rusnak may have been assisted by third parties and we will have to follow that through very carefully at a later stage.”
Ludwig’s report says Rusnak “circumvented the controls that were intended to prevent any such fraud by manipulating the weak control environment in Allfirst’s treasury.”
His trading activities did not receive the careful scrutiny “that they deserved.”
Bank executives did not appreciate the risks associated with Rusnak’s hedge-fund style of foreign-exchange trade.
“Even in the absence of any sign of fraudulent conduct, the mere scope of Mr. Rusnak’s trading activities and the size of the position he was taking warranted a much closer risk-management review,” Quinn said.
Quinn said that because no one knew what was happening, there had been no coverup. AIB has no evidence that Rusnak had personally stolen any funds, said Quinn, who further stated that there has been no scapegoating.
“We’ve got a bank to run,” Quinn said. “We’ve got people who have got jobs to do. When blame arose we’ve identified it.”
“It is very easy to respond to a baying pressure outside that heads must role. That’s the easiest thing to do and say this is a strong board and we go and slash everybody who is near the premises. But that’s a mistake and a bad judgment.”
Asked about the possibility of a takeover of AIB, Quinn said he had heard about takeovers every three or four months since he had become chairman almost six years ago.
“Nobody, ever, has asked me about taking over AIB,” he said.
Ludwig’s report, which was published in full, describes Rusnak as an “extraordinarily active trader.”
On some days his turnover reached nearly $4 billion. During last December, the turnover in foreign exchange dealing at the U.S. Allfirst bank was $25 billion.
“Mr. Rusnak was perceived as an active trader and a profitable client for the brokers,” Quinn said.
“Many brokerage firms wanted to cover Mr. Rusnak. The brokers and traders heavily entertained Mr. Rusnak with meals, hotels stays, golf trips, Super Bowl tickets and other travel.
“He apparently liked to be wined and dined, and the brokers obliged.”
The report says that while Rusnak, who was not interviewed by the investigators, was reported by colleagues to be hardworking, a good family man, a regular churchgoer and a parochial school board member, many found him to be “arrogant and abusive.”
When required, he was able to use a strong personality to “bully” those who questioned him.
“Mr, Rusnak took advantage of weak and inexperienced employees in the treasury control groups,” the report said. “These employers, by virtue of their inexperience, poor training, poor supervision and, in some cases, laziness, facilitated Mr. Rusnak in circumventing controls.”
In his recommendations, Ludwig warns that “trading by ‘lone wolves’ should be highly discouraged.”
“Trading performed in a team environment is more likely to be controlled,” the report said. “Group ethos and attention lessen the chances that one single trader will engage in unauthorized or unethical activity.”
It is for good reason, the reports says, that U.S. banks are required to have a guideline that bars traders from trading two weeks a year. Having a second employee take over for even the most trusted bank employee is a mechanism for uncovering fraud.
“Although Mr. Rusnak did take vacations, the efficacy of the two-week rule was vitiated because Mr. Rusnak was allowed to continue trading from his computer,” Ludwig’s report said. “He also traded at home and at night, but his trading was not monitored appropriately. The control weakness was the failure to verify this after-hours trading.”
The report says Rusnak, who was paid a basic salary of $102,000-122,000 during the five years of losses, just missed out on a final bonus that would have almost doubled his annual salary.
He was paid bonuses totaling almost $320,000 in the three years 1998-2000 but lost out on the final 2001 bonus of $220,000 dollars because it was due to be paid on Feb. 8 — four days after Allfirst discovered the scandal.